UNCLAS SECTION 01 OF 02 HO CHI MINH CITY 001238

SIPDIS

STATE FOR EAP/MLS AND EB/TPP/BTA/ANA
STATE PASS USTR ELENA BRYAN AND GREG HICKS
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO
TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: EFIN ECON ETRD EINV VM WTRO BTA WTO SOE FINREF
SUBJECT: FOREIGN BANKER EVALUATES VIETNAM'S FINANCIAL SECTOR

REF: Hanoi 3028


1. SUMMARY: Vietnam's financial markets are evolving, but the
pace of evolution is slow and access to capital is limited for
all except state-owned enterprises (SOEs), according to one of
the leading foreign bankers in the country. At a recent
investment conference hosted by the Ho Chi Minh City People's
Committee, the chief executive of Hong Kong Shanghai Bank (HSBC)
in Vietnam told an audience of local and international business
representatives that investors need to think long-term and keep
up with Vietnam's changing regulatory environment when planning
investment in Vietnam. END SUMMARY.


2. As part of the November 8-9 HCMC Investment Mart, Alain
Cany, CEO of HSBC Vietnam and chairman of the European Chamber
of Commerce in Vietnam, provided conference participants with a
valuable overview of Vietnam's financial sector, which is small
but growing. Banks are the main form of financial institution,
though less than two percent of Vietnam's 82 million citizens
have bank accounts. Vietnam is still primarily a cash-based
society; only 60 to 70 percent of business transactions go
through the banking system. There is as much as USD 5 billion
in savings outside the banking system, which is equal to 25
percent of GDP, Cany said. While only 120,000 credit cards have
been issued in Vietnam, there were no credit cards available
three years ago and the number of bank accounts have doubled in
the same time frame.


3. Cany noted that Vietnam's five state-owned commercial banks
continue to dominate the banking sector, accounting for 80
percent of total lending, most of which goes to SOEs. Private
joint stock banks account for another 10 percent of lending,
while foreign and joint venture banks account for the remaining
10 percent. According to Cany, the lack of an effective

clearing system and an uneven playing field between domestic and
foreign banks are two of the main disadvantages of the
Vietnamese banking sector. Movement of funds within the banking
system is inefficient; clearing is done manually via messengers.
Clearing between institutions in different provinces takes
three to four days. Foreign banks still face restrictions on
access to domestic deposits and foreign currency funds from
local residents and restrictions on branches and off-site
automatic teller machines (ATMs).

OTHER FINANCIAL INSTITUTIONS


4. Securities markets in Vietnam are also small, but growing,
Cany reported. The Ho Chi Minh Securities Trading Center has 30
listed companies, and the Hanoi over-the-counter market had six
listed companies as of July. Secondary market trading
activities are limited, and the reporting and transparency
requirements of the official markets make some companies
hesitant to list. However, Cany said company shareholders are
beginning to understand how listing can increase liquidity. In
October, the GVN raised the limit on foreign ownership in listed
companies from 30 to 49 percent. As a result of these positive
developments, Cany predicted the markets could double or triple
their size in the coming year, albeit from a low level.


5. Other capital markets, including the bond market, are
predominantly short-term in nature, according to Cany. Banks
are relied on to provide medium- and long-term capital, and
since most Vietnamese bank deposits are short-term, Cany said
there is a danger of foreign currency mismatch, particularly
because hedging mechanisms are limited in Vietnam. Vietnam has
an underdeveloped bond market; while the GVN has been an active
bond issuer, corporate bond issuance is almost non-existent.

REGULATORY ENVIRONMENT


6. While there have been positive regulatory developments in
the last five years, the environment is still evolving, Cany
observed. On the positive side of the ledger, the State Bank of
Vietnam is beginning to allow certain types of derivative
instruments, including interest rate options, which permits
hedging against foreign exchange and interest rate risk. The
GVN has also begun to reform its personal income tax structure.
It has lowered the personal income tax rate from 50 percent to
40 percent, with further reforms planned. Cany said tax rates
must be lowered further because tax evasion is widespread;
foreign-invested enterprises and SOEs are virtually the only
taxpayers in Vietnam.


7. The U.S.-Vietnam Bilateral Trade Agreement and Vietnam's
impending accession to the World Trade Organization have
provided and will provide a roadmap for further improvement in
the legal system, Cany said. Other improvements include a new
Enterprise Law, currently being considered by the National
Assembly, and plans to raise the maximum foreign ownership stake
in commercial banks to 30 percent in 2006. However, the new
Unified Investment Law, also under consideration by the National
Assembly, will have a negative impact on the regulatory
environment if it is passed in its current form. According to
Cany, the law could set Vietnam "back by 20 years."

COMMENT


8. Cany's assessment of Vietnam's financial sector mirrors the
views of many other HCMC businesspeople. He did not pull any
punches, even with top HCMC government leaders sitting in the
front row of the audience. His assessment of the draft
Investment Law follows on the submission to the GVN of a letter
from the American, European, and Australian Chambers of Commerce
that strongly criticizes the current draft of the law (reftel).
WINNICK